It has been some time since I have posted anything, and there is some reason for that. I have been busy looking at a business that I am thinking about buying. Let me tell you a bit about the business, and then a bit about why it has taken so much of my time. Fair warning, this post may be a bit more autobiographical than most because I found my own mental state to be intriguing. It is perhaps something like the stages of grief, except, I suppose we have an option to move out of them. I hope I do better than this…
A brief outline of the business:
I have been looking at the listings of various business brokers for the last six months here in Australia. I have now evaluated and rejected several thousand businesses as not hitting the rather stringent criteria that I have. I found this one, a company that produces concrete reinforcing steel in small town an hour North of Sydney. The business has been around since 1968, and is on its second owner. He would like to retire. His son chose another profession, so he chose to put it on the market. Without breaking my confidentiality agreement, it has decent margins, and relatively stable turnover. The current owner has been absent for over a year, so it’s pretty hands off, and the operations manager is a pretty classic salt-of-the-earth kind of guy. It has pretty decent barriers to entry given that steel re-bar cages cannot be shipped economically, so the only real competition is unionized labor on-site. It employs six people, who do not need formal qualifications. The job of cutting, bending, and welding steel does not require any specific qualification or language skill, so I believe that this could be a great place for people who would like to give people the first rung on the employment ladder. My plan would be to buy it, keep working at Google, at least for now, and try to fashion it into a social-enterprise over the long-term.
Stage 1: Fear, the (mostly) skipped stage:
So that was all the good news, unfortunately, the current owner has been using it as something of a piggy-bank for himself (a couple of luxury cars are owned by the company), so it is pretty difficult to determine the value. Doubly-concerning, the son who didn’t want to take it over is the accountant. Trebly-concerning, the industry is rife with cash and under-the-table payments, so it’s very difficult to know what is happening.
There is an old phrase in investing, buy the funeral and sell the wedding. People tend to overweight both the good and bad. This is, they tend to think categorically, and not quantitatively. I remember a case in a value investing class taught by Bruce Greenwald at Columbia. We looked at a car company wherein the CEO had a gambling habit, and ‘hired’ a couple of his kids. The total malfeasance was something like $100K, but the value of the mispriced stock was something like $10M if you could have bought enough. Everyone was terrified, but the real value was two orders of magnitude greater. I have not forgotten what it was like to see the looks on people’s faces when they were told what they could have made if they had invested at the right time. I have tried, and in this case mostly succeeded, in inoculating myself against this fear, but if I am honest, it was still there a bit. I am still looking at the financial statements, but I think there is a viable business underneath.
Stage 2: Greed
I initially evaluated this almost entirely from a profitability standpoint. I reasoned that if there were no profits, then I would have a very difficult time taking on less-efficient, inexperienced employees. It would also be difficult to reallocate those profits to the causes that I would like to support. It would also be difficult to get my money back out.
Perhaps it is not surprising to others, but it was surprising to me, that very quickly I started to think about how much money I could make, and how if I could string together a few businesses like this, I could make several multiples of my current income. I still thought about how I could help the people in some of the grindingly poor countries near here, and about giving a decent wage to the individuals in the business, but for at least a few days, I was enamored with the idea of how much money I could make. It wasn’t until I was laying in bed with my wife one night and I asked ‘what would we do if we had $750k per year’ that I realized I was losing my grip. I could not even conceive of what I would want for $750K/year, but oddly, much like the people in my ‘Enough’ post I started to think that more was better.
Stage 3 Shock and Self Doubt
After this somewhat startling realization, my reaction was a bit of self-doubt. I wondered what I would do when the profits/dividends were paid out. Would I have the moral wherewithal, to dispose of a larger portion of them to the causes I believe in, or if I would continue with my limited giving? I thought a bit about Plato’s Republic, where we talked about the best society being a monarchy, the trouble with it is that it is difficult to find a good king. Why did I think that I was any different? If a great chunk of cash came my way from this business, then did I really believe that I would be able to say ‘OK, now 90% of this is going to help the poor people in the near abroad, and I am only going to have this small portion.’ How on Earth could I force myself to do the right thing when the time came? This is not like the military where you do something so many times that it becomes second nature when it becomes tough, or is it? I can still remember the ‘ditty’ that was taught to me about how to sight in my M-16A2 service rifle on Parris Island in 2003: ‘thumb Screw, high in the pocket of the shoulder, grab air, high/firm pistol grip, rotate down, relax, natural point of aim.’ It probably all sounds meaningless to people who are not Marines, but it is the process that Marines go through every time we put our rifles to our shoulder to make sure that we are looking through our rifle sights exactly the same way every time. After enough practice, vocalizing is unnecessary, it just becomes second nature, even when your heart is racing. Perhaps the same type of matra training would work in the business world, but in business, we don’t have such ‘ditties’. To the extent that they exist, they are rarely about how we maximize the amount left on the table to consumers, suppliers, employees, and society. Perhaps others have them, but I must have missed that class a Columbia Business School. How could I prevent myself from doing the business equivalent of ‘shooting from the hip’ and wasting all of my rounds, even though I had every intention, at the outset of hitting my mark?
Stage 4 Bargaining with my future self
Mercifully, I am not the only person who had been through this life or this process before, so I did a bit of reading so see if there was some type of contract that I could put my future self in to force him to do the right thing.
First, after chatting with my friend Paul he pointed me to John Wesley. Wesley had a novel solution. After realizing that he had gambled away the money that he could have used to pay for his maid to have a shawl, he was so ashamed, that he capped his income at 28 pounds for his entire life, so that he could give more to the needy around him. By the end of his life, he was giving almost 90% of his income to those in need. My friend immediately pointed out that this is much easier without dependents (Wesley was childless). There is another danger in this approach, as we can see from Mr Money Moustache, who I mentioned a few posts ago. Much like the Amish, Mr Money Moustache seems to be focused on being independent from society, his focus on thrift is largely about reducing dependence. It may seem obvious, but being focused on independence and thrift is not the same as being focused on making the world a better place. For me, I think that if I capped my income, then I might be able to use that as a bit of a crutch to force myself to give more, but I don’t think that I would be doing much to improve my selfish, security-needing character. Then again, this is not supposed to be about me and my personal struggles with my moral failings, so it could work. One more positive antidote to this could come by way of a very interesting talk by Tim Keller. He had the thesis that money reveals what your real treasure is. Whatever you find it easy to spend money on is what you care about. If you stash it, then you may be out for security. If you spend it on clothes, then you may be out for image. Is it possible to create a proactive goal where your spending reveals that you care? I see no reason why this is not possible, even if it is not common.
Next, I read Muhammad Yunus’ book Creating a World Without Poverty: How Social Business Can Transform Our Lives. He seems to believe that the profits of any enterprise can be used to repay the investors, but he does not seem to like interest of any sort. Logically, I had to disagree with him. I had this thought pattern: if I did not factor in the potential losses/default in a deal, then after enough investments I would invariably lose money since not all of my investments would pay off all of the time. This does not even mention the implicit inflation tax.’ At an inflation rate of just 2%, my potential investment pool would dwindle to half of its purchasing power in ~36 years. Long-term, in this environment, the only pools of capital in existence after a long amount of time would be those that take interest. While this may all be logically correct, Yunus is an economics professor, and he undoubtedly knew this before starting the Grameen Bank, and getting his Nobel. I doubt that he would disagree with me about anything I have said above, but I suspect that he would tell me that I have missed the point. It is very easy to hide behind potential failure risks, and inflation as reasons why we expect interest on our money. The fact is that Yunus is very clear that ‘double bottom line businesses will not work.’ He thinks that if times are going well, then everyone will be happy to talk about the ‘second bottom line’ be it the environment, the community, or whatever, but if things are going badly, then no one will want to hear about it. Unfortunately, it is in those environments where people are in the most urgent need. Personally, I can now see why. When I framed investing in this enterprise as a business, then I wanted an astronomical rate of return to cover my potential for loss, but when I framed it as an attempt to employ the marginally employable, and create a quality product that could make people’s lives safer/better, then I was less concerned about the rate of return. Starting my search with a business-mindset had probably poisoned my pursuit. Perhaps Yunus is correct, that we can only serve one master, and that master needs to be the not-for-profit. Perhaps it is possible to couple this with the positive goal of giving that I mentioned in the last paragraph and set that as the objective.
Unfortunately, I have not fully committed to just one cause that I want to support. I am still wrestling with the big questions arounds the ends to which we should be working that I brought up in my ‘why’ post and some of my posts about truth. I started to dig into some of the work by the Effective Altruists, and even joined the group for Sydney. They have some very interesting rational ideas about how to approach giving that both deal with the practical human foibles that I have mentioned above. For instance they encourage people to give what you can, by which they mean asking people to give 10% of their income (is it a coincidence that this is what tithe was supposed to be? Perhaps what is old is new again). To further prod people towards this goal, they do a very interesting job of showing how disparate the world’s income is, and what could be done if you donated. The founder’s pledge is similar, it tries to get founders of organizations to donate 2% of their earnings to a nonprofit of their choice. The effective altruists also try to be relatively prescriptive about where to put your money. They rely on relatively straightforward utilitarian calculations of trying to do the greatest good for the greatest number, and couple that with diminishing marginal returns to every type of investment. That’s fine as far as it goes, but it means that some giving may not be rational in some time periods (because more positive avenues of giving are available later), and also mean that the specific group of people you serve can change dramatically. Much like this interesting article about how the gay head of the Ford Foundation sought to remove funding for LGBT issues because he thought that there was enough money going to it.
In the absence of a unifying cause or giving pattern, I had a bit of a think about something that I will term ‘positive masochism.’ Masochism is typically the perverse enjoyment of pain. Might it be possible to design an organization such that the leader is always in pain, and that might be the indicator that he/she is doing the right thing? If I do not trust myself to point me to do the right thing, then pain could ironically be the indicator that I am heading in the right direction. For instance, if I know that I have a natural tendency to hoard cash for ‘security,’ then perhaps my pain is an indicator that I am acting in the right way. To make a simple analogy, if I were a drug addict, then the days of shaking, sweating, and pleading for my next hit might actually be an indicator that I am off drugs and therefore doing the right thing. This is where the ‘positive’ comes in. It is not that I will ever enjoy the pain like a real masochist. In all likelihood, I will always seek security in money, seek to try to become significant in the things that I do on Earth, but if I am actively giving away so much of my cash and working in an industry where all of my peers at Google think I am absolutely crazy, then at the very least I do not have to worry about my motives, and if I am still doing it, then it is an indicator that I am doing something for society, and not for myself.
Unfortunately, most of our actions are not as easily isolated as a physics experiment. People, myself included, almost always have some positive and some negative motivations. I read Reinhold Niebuhr’s The Irony of American History, and I will give you one of the most beautiful passages out of it
Through the whole course of history mankind has, by true spiritual instinct, reserved its highest admiration for those heroes who resisted evil at the risk or price of fortune and life without too much hope of success. Something their very indifference to the issue of success or failure provided the stamina which made success possible. Sometimes the heroes of the faith perished outside the promised land.
I want to focus merely on the first and last sentence, the admiration and perishing. There are those, sometimes seen in the military, who are out to find glory in suffering. Napoleon perhaps apocryphally remarked that it was amazing what men would do for a bit of cloth on their chest. I have felt this before. I remember a time when I wanted awards on my chest as a young Marine, where I wanted to see combat, not just for the adventure, but also because I wanted praise. Even here, in total sacrifice, the ultimate pain, there can be mixed motives, so even ‘positive masochism’ does not provide a route towards pulling out the better angels of my nature.
Stage 4 Acceptance
If showing love to those in the circle of care is to be the primary point, then I have not yet found an internally binding contract to force my future-self to do that. I continue to be motivated by fear, greed, security, and adulation. When coupled with my short-sightedness, this is truly a problem. I see no way to ensure that the actions of my future self will be aligned with what is right than a continued personal striving for moral improvement, and sadly, I see no shortcut to that.
Stage 5 Offer
I put in two offers with slightly different terms on the business as I was told that there was another prospective buyer. At this point, I am at peace with acceptance or rejection of my offers.
Interesting things I’ve looked at since the last post
A larger portion of refugees are illiterate/innumerate than I thought. Perhaps I am solving the wrong problem.
Bankers are irrational: I looked into financing the business above, and all they wanted as security was residential property. Despite the IMF noting that housing is at least 10% over valued and debt in it is 99% of Aussie GDP, the second highest in the world. Alternatively, they could have collateralized on the stock, steel, which has a spot market…
Producer Price Index: The more up-stream version of the CPI. I was looking at it to determine the demand for steel. I post it here (US) and here (AU) only to note what an amazing world we live in. I would not have thought that steel only occupies 2.344% of the value weighted basket of goods for producers, but just the fact that we track that is a bit amazing to me.
Problem: when we make things, there are externalities that are not always factored in (bribery in the supply chain, child labor), that’s why it is important to pay attention to more than just profit. Global Reporting is supposed to do this they undoubtedly have a lot of experience in reporting on social enterprise but the presentation SUCKS, I mean REALLY SUCKs. Want to find out what guidelines they track, why don’t you download a 40Mb zip file and open it all up yourself. Maybe this is why we don’t have commonly understood guidelines about what we optimize for outside of profit, because we have done such a TERRIBLE job explaining it. There are other methods, but the fact that there are so many works against them.
In my latest effective altruism meetup, one of the attendees suggested that I look into a Co-Op structure for a re-bar business that I am thinking about buying. It turns out that co-ops have been around for a LONG time (see here) and there is some data to point to them being more durable than traditional corporations. I read one book on the subject, but it is so punctuated with vitriol, that I don’t recommend it.
This Astro Teller speech great talk on the cultural components of innovation (the most important bits).
I tried to make it through The Pale King. I can see why people think it could be a classic. Unfortunately, to me it seems like the literary equivalent to shaky-camera filming (e.g. Blair Witch), very point of view and jarring. There are moments of real insightful views of a group of people that coke from the best writers, but I had such difficulty with the persistent POV style that I just put it down ¾ of the way through.
The Third Chimpanzee: Not as good as Guns Germs and Steel, nor Collapse, but it is nice to be reminded about the fate of our ancient ancestors from 100,000 to just a few thousand years ago. We were never altogether bright (the collapse of civilizations on Henderson), nor were we great conservationists (the death of almost all the megafauna species a few hundred/thousand years after the arrival of man), nor were we ever that kind to each other (the instances of genocide not just between europeans and aboriginal people, but between those people). It’s a good reminder for me to remember some of the more negative traits of some of the people I worked with in Afghanistan/Haiti. No man is an Angel.
A fighting chance: I read it, after my boss recommended it to me. There is a passage in it where the treasure secretary effectively tells her that she’s got to decide if she wants to be an insider with influence but doesn’t criticise or an outsider without influence, but all of the ability to criticize that she wants. It makes me wonder if it is really ever possible for someone like me to be an outsider. A white, new-rich upper class American male who went to an Ivy League school and worked in the Military, Congress, and Google. I will probably forever be seen as an insider, regardless of what I do. If that is true, then there is no advantage to being uncritical, and all of the upside comes from trying to make things better. Warren talks a bit about this when she talks about running for Senate. As a Harvard professor, regardless of her upbringing, she had trouble connecting with the common man, and she was elected in Mass!
So many strands of my life Australian-American life connect on the tiny island nation of Nauru. Tragic but interesting story about it on This American Life this week. I had not realized that Australia has offered a piece of land to the people of Nauru, (but not to the refugees it houses…my opinions on this remain here), nor that the US promised riches in exchange for some support. There are probably some lessons here about greed, and what happens to countries/people with little to offer.
This podcast: with Sebastian Junger, the author of A Perfect Storm and Restrepo. He is not the first person to remark upon it, but he did it so well. Many young men want to prove their manhood by showing their bravery in some struggle/cause, and if we don’t provide an outlet for that, then they will find some other way to do that. Perhaps a gang, perhaps outright rebellion against the police.
Please, tell me what you thought before reading this, and let me know if this changed your mind.